Test: Company Accounts Issue Of Shares - 1 - Commerce MCQ

Forfeiture & Reissue of shares

• When some shareholders are unable to pay one or more amounts, such as allotment money or call money, the shares can be forfeited.
• In such cases, the firm has the option to forfeit the shares, thus cancelling their allotment.
• After the shares are forfeited, the company can re-issue the shares, in this case it is known as re-issue of forfeited shares or reissue of shares.
• After the shares are forfeited, the company can re-issue the shares, in this case it is known as re-issue of forfeited shares or reissue of shares.

The correct answer is ₹20,000

• Amount received on Application = 500 x 30 = 15000
• Amount received on Allotment (excluding premium)= 500 x 10 = 5000
• The amount of Shares Forfeiture = Total shares forfeited x Amount received (excluding premium)
• The amount of Shares Forfeiture = 500 x (30 + 10) = 20,000
• The amount to be shown in Shares Forfeiture Account is 20, 000

The correct answer is 25%.

Buy back of shares - These refers to a company repurchasing its own shares from its existing shareholders.

The following procedures have been laid down for buy back of shares-

1. The Articles of the Association must authorize the company for the buyback of shares.
2. A special resolution must be passed in the companies’ Annual General Body meeting.
3. The amount of buy back of shares in any financial year should not exceed 25% of the paid-up capital and free reserves.
4. The debt-equity ratio should not be more than a ratio of 2:1 after the buyback.
5. All the shares of buy back should be fully paid-up.
6. The buy-back of the shares should be completed within 12 months from the date of passing the special resolution.
7. The company should file a solvency declaration with the Registrar and SEBI which must be signed by at least two directors of the company.

Therefore, the buy-back of equity shares in any financial year cannot 25% exceed of its total paid-up equity capital in that financial year.

The incorrect statement is The profit on re-issue of forfeited shares is transferred to General Reserve Account. 

Shares - a part or portion of a larger amount which is divided among a number of people, or to which a number of people contribute. The person who hold shares are called shareholders.

Option 1: Forfeited shares can be reissued.

• Forfeited shares may be issued again as fully paid at a par, premium,  discount.
• It should be noted that the discount permitted on reissue of forfeited shares cannot exceed the amount received on forfeited shares at the time of first issue, and that the discount allowed on reissue of forfeited shares shall be deducted to the 'Forfeited Share Account.'
• Hence, this statement is true

Option 2: A notice of 14 days to shareholders is necessary before forfeiture of shares.

• In the event that the amount on calls is not paid, a firm may forfeit shares. Prior to forfeiture, the corporation must first send the defaulting shareholder a clear 14-day notice that he must pay the outstanding balance plus interest.
• Hence, this statement is true

Option 3: Premium on issue of shares can be used for writing off the preliminary expenses.

• Preliminary expenses are any costs incurred before a firm is created, or before the start of corporate operations.
• Any initial business expenses may be deducted from the Securities Premium Account.
• Hence, this statement is true

Option 4: The profit on re-issue of forfeited shares is transferred to General Reserve Account.

• The profit on re-issue of forfeited shares is transferred to Capital Reserve Account.
• Hence, this statement is false.

Thus, in above question "the profit on re-issue of forfeited shares is   transferred to General Reserve Account is not correct"

Bonus shares are issued to the Existing employees at free of cost.

Bonus Shares:

• Bonus shares are additional shares given to the current shareholders without any additional cost.
• These are company's accumulated earnings which are not given out in the form of dividends but are converted into free shares.
• A company may choose to provide pre-existing shareholders with bonus shares in the event that it isn’t able to pay dividends to them.
• The basic principle behind bonus shares is that the total number of shares increases with a constant ratio of number of shares held to the number of shares outstanding.
• Companies issue bonus shares to encourage retail participation and increase their equity base.
• When price per share of a company is high, it becomes difficult for new investors to buy shares of that particular company.
• Increase in the number of shares reduces the price per share. But the overall capital remains the same even if bonus shares are declared.

The correct answer is individuals buying and selling the stock.

The market price of a share of common stock is determined by individuals buying and selling the stock.

• Once a company goes public, its shares are available for trading on a stock exchange.
• A stock's initial public offering (IPO) is at a price equal to the value of its expected future dividend payments.
• The public can buy and re-sell its shares.
• The price is determined by supply and demand in the market. 
• If there is a high demand for its shares, the price will increase and if there is a low demand for its shares, the price will increase.
• If an individual think that the future of the company does not look good, he might want to sell off as quickly as possible.
• If an individual think that the future of the company looks good, he might want to retain it in the hope that the share price will increase.

The correct answer is Reserve Capital.

Reserve Capital:

• A company may set aside a portion of its uncalled capital to be called only if the company is wound up.
•  The company's uncalled sum is referred to as 'Reserve Capital.'
• It is only available to creditors in the event of a company's liquidation.

Reserve Capital: According to Section 99 of the Companies Act 2013, Reserve Capital refers to that portion of uncalled share capital which shall not be called up, except in the event of winding up. It is not shown in the balance sheet of company and there's no compulsion to create reserve capital, a special resolution is required for creating reserve capital.

The correct answer is 10%.

Calls in arrears- is the non-payment of the amount due on allotment/calls by shareholders.

Rules for charging of interest on calls in arrears:​

• The Articles of Association(AOA) of a company may empower the directors to charge interest at a stipulated rate on calls in arrears.
• If the articles are silent, the rule contained in Table A shall be applicable.
• Table A states that the interest at a rate not exceeding 10% p.a. shall have to be paid on calls in arrear amount on shares for the period intervening between the payment of amount due and the time of actual payment.
• Calls in arrears is a deducted from called up capital to arrive at paid up capital in Balance Sheet.

The correct answer is Capital Reserve Account.

• The corporation has shares that have been forfeited for sale. The corporation is required to dispose of the forfeited shares following their forfeiture.
• To reissue forfeited shares, the firm needs to pass a resolution at its board meeting. Reissuing forfeited shares amounts to the corporation merely selling its stock. These shares are not distributed by the corporation.

The correct answer is ₹4.

Reissue of Shares:

• The price at which the shares are reissued is up to the firm, but the total amount received on the shares cannot be less than the amount that is owed on the shares.
• The sum paid out to both the first allottee and the second buyer is referred to as the entire amount in this context..

In the above question, A company forfeited 100 equity shares of ₹10 each on which a final call of ₹4 per share was unpaid, it means ₹6 is paid.

Hence, the company can reissue the share at minimum price of ₹4, because maximum discount should not be exceeded the paid amount.